Associates First Capital Corp., the former Ford Motor Co. subsidiary better known as The Associates, made a big move to increase its subprime auto lending business last week when it agreed to acquire Arcadia Financial Ltd. for $200 million.
The combined business expects to buy around $250 million worth of subprime auto loans monthly, said Matt Hollingsworth, senior executive vice president of consumer operations for The Associates.
'We've structured this deal where we really don't have to reach for bad business,' Hollingsworth said in a phone interview. TranSouth Financial Corp., of Irving, Texas, is the primary auto-lending subsidiary for The Associates.
Arcadia changed its name from Olympic Financial Ltd. in 1997. It is one of several companies caught up in a shakeout in the subprime auto sector. The company was founded in 1990, and began trading on the New York Stock Exchange in 1996.
It was beginning to turn around its financial fortunes. Late last year, Arcadia adopted stricter lending standards, stopped buying certain high-risk loans, and stopped retailing repossessed vehicles. Arcadia, which is based in Minneapolis, earned $31 million in the first nine months of this year. It lost $88.2 million in the year-ago period.
'From an operations perspective, the credit practices they have, the people they have, they have really turned themselves around,' Hollingsworth said. 'There are substantial savings to be had on the funding side, and we'll be able to reduce those costs substantially.'
The Associates bought Arcadia for $200 million in cash. Arcadia shareholders also may earn some income from Arcadia's existing loans as they are paid off, if they perform as expected.
The new partners are a logical fit.
Arcadia, with about 1,100 employees, is a small company with a big auto loan portfolio. Due to difficulties of its own, and problems that are common in the subprime segment, Arcadia's cost of capital was high, and rising. To raise funds, Arcadia was even advertising its corporate debt on drive-time radio, promising a return of more than 8 percent, for investments as small as $1,000.
The Associates is a big, well-capitalized company with access to cheap money. Its auto loan portfolio is relatively small, but growing.
Like Arcadia, TranSouth is a subprime lender, in operation since 1989. TranSouth originated about $750 million in auto loans in the first nine months of this year, spokesman Randy Johnson said. Its serviced auto loan portfolio was about $1.8 billion, he said.
In the same period, Arcadia originated about $1.8 billion worth of loans, contributing to a total serviced portfolio of about $5.3 billion, Johnson said.
Hollingsworth said there is little overlap between Arcadia and TranSouth. TranSouth's business is divided between 'relatively decentralized control' of small to medium markets, with independent used-car dealers and franchised dealers, Hollings-worth said. It also has a 'highly centralized group of the very, very largest national relationships, like AutoNation and CarMax.'
Arcadia primarily serves franchised dealers in urban areas, he said.
TranSouth does business with about 5,000 dealers; Arcadia works with about 7,000, Hollingsworth said.
The purchase is expected to take effect in the first quarter of 2000, subject to regulatory approval, and a shareholder vote.
The Associates has been on an acquisition binge ever since Ford spun it off to Ford shareholders last year. That deal was worth $16 billion to Ford shareholders. In late 1998, The Associates sold more stock, to raise a $1.1 billion war chest for operations and acquisitions.
Before Arcadia, other acquisitions this year included:
Newcourt Fleet Services and Newcourt Automotive Services Ltd., the Canadian and British automotive fleet management business of Toronto-based Newcourt Credit Group, representing assets worth about $460 million.
The Shell Oil Proprietary Credit Card, an affinity credit card program with $260 million in receivables and 2.3 million accounts.
Avco Financial Services Inc., Costa Mesa, Calif., a diversified, multinational financial services company, from Textron Inc. for $3.9 billion. Avco is a lender for real estate, retail sales, consumer loans, equipment, inventory and vendor finance, plus credit insurance. It also had a $450 million portfolio of subprime auto loans.
The Arcadia deal gives the Associates more opportunities to cross-sell its other products to Arcadia's customers, Johnson said.
The Associates is a major lender in credit cards, mortgages, home equity loans and equipment sales and leasing. The company says it is the No. 1 finance company for heavy trucks and truck trailers in North America. A subsidiary, US Fleet Leasing, manages more than 200,000 cars, and trucks.